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PERA reform bill passes first test at Capitol

1/29/2010

By Marianne GoodlandTHE COLORADO STATESMAN

The Senate Finance Committee Tuesday voted 6-2 to approve Senate Bill 1, the reform plan for the Public Employees’ Retirement Association. The vote came at the end of a five-and-a-half hour hearing that included testimony from dozens of PERA members, both retirees and current state and school employees.

The bill was sent to the Senate Appropriations Committee.

SB 1 sponsor and Senate President Brandon Shaffer, D-Longmont, told The Statesman he would ask that it be placed on the Friday calendar, hoping to get it to the Senate floor for second reading as early as Friday or on Monday. The bill is being fast-tracked to beat a March 1 deadline for changes to PERA’s annual cost of living increase (COLA).

The committee amended the bill to gain the support of the Colorado Coalition for Retirement Security, a group whose member organizations represent 200,000 PERA members. Coalition spokesperson Lynea Hansen told The Colorado Statesman that the group would support SB 1 only with passage of all three amendments.

The bill initially called for a new tier of membership, with employees hired after January 1, 2011 to move into a “rule of 88” in order to retire with a full pension, the member must be 58 years of age with 30 years of service. Beginning Jan. 1, 2017, the age would increase to 60 years, to a rule of 90. Under amendment 11, the rule of 88 would apply permanently to PERA’s two school divisions. And to avoid having people move into the school division to take advantage of the earlier retirement age, Sen. Pat Steadman, D-Denver, said the amendment also would require that the member work in the public schools for at least 10 years prior to retirement.

Under SB 1, the annual cost of living adjustment would be suspended for 2010 and 2011 if the bill were signed prior to March 1. A second part of that amendment would restore the 2011 adjustment and index it to inflation, capped at 2 percent, unless PERA experiences a negative investment return in 2010. The amendment passed on a 6-1 vote.

Negotiations on the bill drew more Republican supporty, such as from Sen. Greg Brophy, R-Wray. At his request, the bill included language to allow teachers and employees in higher education to work up to 140 days per year, with a maximum of 10 employees allowed for each school or institution. The current maximum is 120 days per year; Brophy’s language in effect gives school districts and colleges employees for nearly the entire school year or almost two full semesters. Brophy said it would be very beneficial to rural school districts and give them hiring flexibility.

The last amendment to pass also applied to the school divisions. Amendment 8 would shift 0.5 percent of the employer’s supplemental contribution, known as the amortization equalization disbursement (AED), to the employees, increasing their supplemental amortization equalization disbursement (SAED), to 2.5 percent. Sen. Mark Scheffel, R-Parker, explained that this would help cover the higher costs for teachers and other school division employees who want to retire at 58 instead of 60.

Sen. Keith King, R-Colorado Springs, who plans to sponsor a bill that would convert PERA to a defined contribution plan, also introduced nine amendments to change the bill, but none passed.

“This is not a bill anyone wants to carry,” Shaffer told the committee. He said that negotiations on the bill went on right up until Monday evening. “We can’t kick this can down the road,” said Senate Minority Leader Josh Penry, R-Grand Junction, the bill’s co-sponsor. “To my Republican friends, 90 percent of the $30 billion [fix] is covered by state employees and through reduced benefits. They’re paying their fair share.”

PERA Executive Director Meredith Williams spoke to the urgency of acting now to fix the problem, explaining that without action, PERA will soon be in a situation where it will be paying benefits with current revenues, leaving nothing for future retirees. “How can we in good conscience ask for contributions from our member employees when we will run out of money before they retire?” he said. “We can’t invest our way out of this.”

King expressed skepticism that the plan will solve the problem. “We’ll be back here in five or ten years” to deal with this again, he said, adding that PERA members should be allowed the option of getting out of the defined benefit plan and going to a defined contribution plan.

PERA General Counsel Greg Smith responded to questions on the issue of the actuarial necessity, considered necessary for PERA to reduce benefits. He pointed out that such a declaration needs to be made by the courts, but PERA believes SB1 would pass that test. There are few case laws that address the issue, Smith said, but one, regarding a fire and police pension plan, was litigated when the plan ran out of money and benefits were being paid for with current revenues. “We believe that when people are paying [contributions], and our projections show we will run out of money before they can draw the benefit…that is the definition of an actuarial necessity.”

But the situation is even grimmer, according to Smith. He explained that when a pension plan’s assets to liability ratio (its ability to pay benefits with existing assets) drops to 40 percent, to keep cash flow going the investment portfolio must be modified. Under that scenario, the pension plan would have to start selling assets to continue to pay benefits.

Penry referred to this as the “death spiral,” and said that without a fix, PERA would be at that 40 percent level in just four years, and the plan would be bankrupt in 16 years. At that point, the state would still have to pay benefits, he said, to the tune of $3 billion per year, or roughly the same as what the state pays for K-12 education.

Supporters and detractors testify in committee hearing

Testimony from witnesses was about evenly split between those who supported SB 1 and those who opposed it.

PERA retiree Connie Anderson, a supporter of SB 1, said she was willing to make her sacrifice to keep the plan solvent. “My experience has shown me how valuable an asset my PERA check is,” she told the committee.

Former state Sen. Norma Anderson, R-Lakewood, herself a PERA retiree, told the committee “you have no choice but to pass this bill. We won’t have COLA for a few years, but that’s okay if it helps solve the future problem.”

Don Schaefer, a coalition member, said no PERA members or retirees want to see the changes contained in SB 1, but they also do not want to see PERA’s demise. “The change in the COLA will be difficult to swallow…and a hardship for most retirees, but the alternative — to do nothing — is unthinkable.” And Eileen Bond of Aurora said it would be “immoral” to drain the fund and leave future retirees high and dry.

Speaking against SB 1, Gary Justus of the fledgling SavePERACOLA.com pointed to a 1961 case involving the Denver Police pension that was litigated before the Colorado Supreme Court. The case was mentioned in a 2004 opinion from then-Attorney General Ken Salazar on whether PERA could legally change benefits. The opinion said that when a member retires, the pension becomes “a vested contractual obligation…not subject to unilateral change of any type by the General Assembly.” Justus said that meant any reduction of the COLA would not pass muster in the courts. Justus also pointed out that many pension plans have a target of reaching 80 percent of full funding rather than the 100 percent desired by PERA.

Several current state employees pointed out that they had purchased service credit, and that those contracts were in breach under the COLA proposed in SB 1. Prior to 2007, PERA members could purchase service credit at rates substantially below actuarial value; this contributed in part to the unfunded liability. That changed in 2006, with the passage of SB 06-235, which raised the cost of service credit to its actuarial value. Steve Johnson of Broomfield pointed out that the actuarial value that was used to calculate the amount of the contract was based on the 3.5 percent COLA. “It’s no longer a fair deal,” Johnson said, and if the state was going to change the COLA to 2 percent he wanted a refund for what he claimed he has now overpaid.

Myron Hulen, an emeritus professor of business from Colorado State University, discussed how changes in the COLA would affect retirees. The average PERA pension is $2,772 per month he said. A family of two with an income of about $2,246 per month qualifies for public assistance programs. By reducing the COLA to 2 percent, with an inflation rate of 4 percent per year, the PERA retiree would qualify for public assistance in seven years. At 5 percent, it’s less than five years, he said.

Hulen made several suggestions to address the problem: a four-tiered COLA with those with high benefits getting a smaller adjustment, and extend the amortization to 40 years.

Retiree Carol Pace said the COLA is a contractual obligation and “if you break this contract you will break others.” She asked that the committee fully explore the legal ramifications, and to send interrogatories on the bill’s constitutionality to the Supreme Court “before you put us in a position of taking you to court.”

Several retirees pointed out that they were taking the biggest hit to shore up PERA’s finances. Williams responded that the immediate burden of the cuts does fall on retirees — it hits them in March. Current employees will pay more in the out years, he said, and some costs will be borne by people who are not yet hired. “But the only way we survive is to impact more immediate cash flow” in the form of the COLA, he explained. “If we cannot impact the COLA we cannot effectively address the shortfall,” Smith said.